Why Proactively Engaging with Participants Matters

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Employers that sponsor retirement plans should be concerned about lost and missing participants. Each year, the U.S. Department of Labor (“DOL”) conducts rigorous and ongoing investigations that deplete significant company resources and time and result in substantial penalties. As recent enforcement statistics show, DOL continues to pour resources into the missing participant initiative and shows no signs of slowing down. In 2021 alone, DOL recovered over $1.9 billion in assets associated with their enforcement program. The bulk of those assets, $1.5 billion, were related to the DOL’s terminated vested participant project focusing on missing participants.1

As these statistics demonstrate, a plan sponsor’s failure to manage its participant population is a recipe for disaster. To mitigate the risks of the massive costs associated with governmental investigations, plan sponsors should evaluate their process for communicating with participants to keep in contact with current and former participants alike. Proactive steps can significantly reduce the risk of fines and penalties resulting from government enforcement of missing participant initiatives.

To help plan sponsors meet these goals, this article will describe (1) why plans have missing participant issues; and (2) the practices that a plan sponsor can follow to minimize these risks.

Why do plans have missing participant issues?

To better prevent missing participants from occurring in the future, it is essential to understand why plans have historically had issues keeping up good records for plan participants in the first place. Plan sponsors may have difficulty maintaining accurate records for many reasons. For instance, it is not uncommon for plan participants to forget to update their contact information, address, phone number, and personal email address with the plan while they are active participants and especially after they separate from service with the employer. Thus, the plan sponsor may have the participant’s prior address but be unaware that the participant has since moved or changed their phone number or email address. Moreover, it is not uncommon for plan- related records, particularly for older plans, to be outdated or in analog form. Thus, the records may not be exceptionally reliable given their age and condition. It is normal for data errors to occur when a plan changes recordkeepers or third-party administrators; in particular, changes in recordkeepers require mass data transfers, which commonly leads to data issues.

In addition, corporate merger and acquisition activity often result in out-of-date plan records. In this regard, the successor employer may not have accurate contact information for prior participants of the merged plan that never worked for the successor employer. The successor employer may also rely on the original company’s census data related to active employees, transferring unverified information to the new plan.

DOL Enforcement & Potential Penalties

Due to the common nature of the issues detailed above, DOL continues to investigate retirement plans for missing participant issues aggressively. In this regard, the DOL generally cites the following statutory requirements during investigations:

ERISA sections 104(a), 104(b), and 209(a)(1) require that plans furnish yearly filings and disclosures to the Secretary of Labor and participants, as well as mandating the maintenance and retention of all records necessary to determine the benefit that is due (or may become due) to each participant. Letters from DOL make it clear that DOL views the failure to maintain accurate data a fiduciary breach. For instance, in one investigation DOL alleged that “Our investigation revealed that the records for the [plan] include a substantial amount of missing or incomplete information...By failing to maintain complete, accurate, and up-to-date records, the [fiduciaries] compromised the smooth functioning and proper administration of the [plan], which resulted in delays in the processing of benefits, the payment of benefits in improper amounts, and the filing of inaccurate information in the annual report for the Plan, which violates ERISA sections 104(a)(1), 209(a)(1), and (404(a)(1)(A), (B), and (D).”
The fiduciary standards in ERISA section 404(a)(1)(A) and (B), which require plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries, and section 404(a)(1)(D), which requires plan fiduciaries to discharge their duties following the documents and instruments governing the plan insofar as such documents and instruments are consistent with ERISA. In this regard, letters from DOL have accused fiduciaries of breaching their ERISA section 404 obligations with language stating that fiduciaries “are obligated to maintain adequate procedures for [locating and communicating with] both terminated vested participants and their beneficiaries of their rights under the [plan] – including their right to receive benefits as soon as they become eligible...By failing to do so, the [fiduciaries] have violated ERISA sections 404(a)(1)(A) and (B)” The DOL has made similar claims that fiduciaries failed to locate and communicate with participants that maintain uncashed check amounts.

These allegations show how seemingly minor infractions can lead to significant concerns from the DOL. Not only that, but these claims can result in high costs and penalties, not to mention the reputational risk for the plan sponsor. Depending on the nature of the allegation, fines associated with such failures range in millions of dollars.

The potential penalties & costs include the following:

ERISA section 409 provides for personal liability against fiduciaries concerning fiduciary breaches. Thus, fiduciaries could be held personally liable for losses associated with poor plan administrative practices.
There is also a risk that DOL could issue fines for failures to give required plan communications. As just one potential example, failure to provide an SPD or plan document within 30 days of receiving a request from a plan participant or beneficiary can result in a penalty of up to $110 per day per participant, adding up to massive liability for more extensive plans.
Moreover, to the extent that a DOL investigation results in ERISA Section 502(l) penalties when entering into a settlement agreement, plan fiduciaries would be obligated to pay DOL an additional 20% penalty.
Plan sponsors could also be held responsible for excise taxes associated with participants missing required minimum distributions, not to mention legal costs related to lengthy and expensive audits and IRS Penalties.

What Practices Can a Plan Sponsor follow to Minimize These Risks?

Despite frequent investigations on these issues, the Department has not issued any formal regulations under ERISA explaining a fiduciary’s obligations to search and locate missing participants. However, it has issued sub-regulatory guidance that may inform fiduciaries on DOL’s views of best practices in this space. In this respect, DOL has described the following steps as “Best Practices” that could help maintain good records and find participants once they go missing, thereby lowering the chances of negative attention towards plan sponsors by the Department. While not all of these practices may be necessary for any given plan, plan sponsors may consider utilizing some or all of them to avoid missing participants and potentially hiring an additional service provider to help them accomplish these tasks.

Maintaining Accurate Census Information for the Plan’s Participant Population

Contacting current and retired participants and beneficiaries periodically to confirm or update their contact information. Relevant contact information could include home and business addresses, telephone numbers (including cell phone numbers), social media contact information, and next of kin/emergency contact information.
Including contact information change requests in plan communications.
Flagging undeliverable mail/email and uncashed checks for follow-up.
Maintaining and monitoring an online platform for the plan that participants can use to
update their contact information.
Providing prompts for participants and beneficiaries to confirm contact information upon
login to online platforms.
Regularly requesting updates to contact information for beneficiaries, if any.
Regularly auditing census information and correcting data errors.
In the case of a change in record keepers or a business merger or acquisition by the plan sponsor, addressing the transfer of appropriate plan information (including participant and beneficiary contact information) and relevant employment records (e.g. next of kin information and emergency contacts) and using plain language and offering non-English language assistance.
Encouraging contact through plan/plan sponsor websites and toll-free numbers.
Building steps into the employer and plan onboarding and enrollment processes for new employees and exit processes for separating or retiring employees (to verify contact information, request any other necessary information, and advise of the benefits owed to the participant).
Communicating information about how the plan can help eligible employees consolidate accounts from prior employer plans or rollover IRAs.
Clearly marking envelopes and correspondence with the original plan or sponsor name for participants who separated before the plan or sponsor name changed.

Missing Participant Searches

Checking related plan and employer records for participant, beneficiary and next of kin/emergency contact information.
Checking with designated plan beneficiaries (e.g., spouse, children) and the employee’s emergency contacts (in the employer’s records) for updated contact information.
Using free online search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries, and social media to locate individuals.
Using a commercial locator service, a credit-reporting agency, or a proprietary internet search tool to locate individuals.
Attempting contact via United States Postal Service (USPS) certified mail, or private delivery service with similar tracking features is less expensive.
Attempting contact via other available means includes email addresses, telephone and text numbers, and social media.
If participants are nonresponsive over a period, using death searches (e.g., Social Security Death Index).
Reaching out to the colleagues of missing participants by, for example, contacting employees who worked in the same office (e.g., a small employer with one or two locations) or by publishing a list of “missing” participants on the company’s intranet, in email notices to existing employees, or in communications with other retirees who are already receiving benefits. Similarly, for unionized employees, using union member communications to find missing retirees.
Registering missing participants on public and private pension registries with privacy and cyber security protections (e.g., National Registry of Unclaimed Retirement Benefits) and publicizing the registry through emails, newsletters, and other communications to existing employees, union members, and retirees.
Searching regularly using some or all the above steps.

A written procedure clarifying the plan’s definition of “missing participant” and the plan representative who is responsible for each step in the process will benefit a plan if the DOL requests information or audit. Additionally, files with proof of execution should be regularly maintained and reviewed by the plan’s committee. Overall, more documentation of effort and validation of communication with all participants will benefit the plan in the case of inquiry from the DOL.

Conclusion

As mentioned above, the best way to avoid liability associated with missing participants is to proactively engage with your plan participant community before it becomes a problem, often above and beyond the services that basic service providers such as recordkeepers and TPAs provide. Thus, employing practices to maintain ongoing relationships with the plan participants is critical. While there is no one-size-fits all approach to this practice, engaging an additional service provider with specific expertise in this area to assist the plan can be very beneficial to avoid the risks detailed in this article. As they say, an ounce of prevention is worth a pound of cure.

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